Quanto Pricing beyond Black–Scholes

Holger Fink and Stefan Mittnik
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Holger Fink: Department of Computer Science and Mathematics, Munich University of Applied Sciences, Lothstr. 64, 80335 Munich, Germany

JRFM, 2021, vol. 14, issue 3, 1-27

Abstract: Since their introduction, quanto options have steadily gained popularity. Matching Black–Scholes-type pricing models and, more recently, a fat-tailed, normal tempered stable variant have been established. The objective here is to empirically assess the adequacy of quanto-option pricing models. The validation of quanto-pricing models has been a challenge so far, due to the lack of comprehensive data records of exchange-traded quanto transactions. To overcome this, we make use of exchange-traded structured products. After deriving prices for composite options in the existing modeling framework, we propose a new calibration procedure, carry out extensive analyses of parameter stability and assess the goodness of fit for plain vanilla and exotic double-barrier options.

Keywords: normal tempered stable process; Lévy process; quanto options; Nikkei 225; calibration; parameter stability (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
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